Launched in 2017 by Stani Kulechov under the name ETHlend and renamed AAVE in 2018, the "ghost" of cryptocurrency attracts with its flash loan and borrowing possibilities. The following analysis of this decentralized financing platform will guide you in your decisions for future investments.
What is AAVE?
AAVE is a decentralized financing (DeFi) protocol that allows for cryptocurrency lending and borrowing, including so-called flash loans. Flash loans are considered the first type of unsecured loan in the DeFi space.
AAVE is built on the Ethereum protocol and is considered one of the largest DeFi platforms, focusing on lending and borrowing cryptocurrencies via a pooled liquidity system. Lenders can earn passive income with relatively low risk from the interest paid on loans, without engaging with third parties or intermediaries.
Here is your guide to the AAVE protocol and its native token, AAVE crypto.
How does this cryptocurrency work?
What is AAVE, and how does it work compared to other cryptocurrency platforms? AAVE is a DeFi protocol that provides loans using a system that is essentially the opposite of going to a bank.
Firstly, there is no financial institution or intermediary overseeing or approving loan requests based on solvency. Instead, AAVE is a “trustless” network that uses smart contracts to execute loans, eliminating intermediaries.
Where a bank would grant a loan in dollars (or other fiat currencies), AAVE loans are in crypto. There are no credit checks or widely accepted scores in the DeFi space, so users must deposit collateral to obtain a loan on AAVE.
Where a traditional bank would secure a loan with physical collateral (e.g., a house for a mortgage), AAVE relies on liquidity pools. Here, users deposit crypto funds they are willing to lend into a single pool, a process sometimes referred to as “yield farming.” Borrowers can then use these pools to take out a loan. Borrowers pay interest on the funds they borrow; lenders receive interest on the funds they lend.
What is a flash loan?
A flash loan is a unique feature on the AAVE platform. These are unsecured products made possible by the workings of Ethereum (AAVE is built on the Ethereum blockchain).
Flash loans are automated and executed quickly, requiring repayment in a single Ethereum transaction. If the principal and interest are not repaid within this time frame, the loan is effectively canceled, and the transaction is erased from the blockchain as if it never happened.
AAVE tokens
AAVE issues two different tokens. The first type is called aTokens, which are given to lenders so they can receive interest on their deposits.
The second type is called AAVE tokens, the native token of AAVE. AAVE serves multiple functions and works like several other types of cryptocurrency, functioning both as a governance token and a trading token that offers users discounts on fees within the AAVE protocol.
AAVE is an open-source protocol, meaning that anyone can view and verify how it works. The platform runs on the Ethereum blockchain. Unlike Bitcoin, which is mined using a complex and resource-intensive proof-of-work process, AAVE tokens are based on the ERC-20 standard.
A collection of smart contracts offers decentralized financial options to users. The rules and regulations on platforms like AAVE are governed by a smart contract code.
The history of AAVE
AAVE was launched in September 2017 and was originally known as ETHlend. AAVE was created by Stani Kulechov. He was dissatisfied with the lack of lending applications built on Ethereum.
In September 2018, the protocol was rebranded and became AAVE. You might be wondering what AAVE means? Well, the word "aave" means "ghost" in Finnish.
An Initial Coin Offering (ICO) for AAVE took place in November 2017, raising $16.2 million during a sale of one billion AAVE tokens (then called LEND), with 300,000 more for investors. In 2020, LEND was replaced by AAVE tokens, with each 100 LEND converted into 1 AAVE, giving a total of 16 million existing coins.
How to use AAVE crypto?
AAVE is designed to be used on the AAVE platform and can offer several benefits to its holders.
Holding AAVE tokens typically gives users reduced trading fees on the platform. Borrowers who offer AAVE tokens as collateral for their loans can also benefit from reduced fees. These borrowers also have the opportunity to take out larger loans. On the other hand, users can lend AAVE and earn interest.
Finally, borrowers of AAVE crypto can take out loans without fees when those loans are denominated in the token.
Similar to some other DeFi tokens, like Uniswap (UNI), AAVE is also a governance token. Holding AAVE crypto gives holders the ability to vote on proposed changes to the AAVE protocol.
Traders can also speculate on the price of AAVE, hoping to buy low and sell high later. Short-term traders must pay taxes on cryptocurrencies when they sell their coins.
There are over 30 different types of crypto users who can lend or borrow on the AAVE platform: for example, ETH (Ethereum’s native token), DAI, stablecoins like Tether or USDC, and more.
Should you invest in AAVE?
Investors who believe decentralized loans will continue to grow may find AAVE crypto attractive.
Owning AAVE provides users with special privileges on the platform, such as transaction and fee reductions. Furthermore, because AAVE is one of the largest DeFi lenders, it has high liquidity.
In terms of stability, longevity, and commitment to innovation, AAVE continues to be one of the leading platforms in the DeFi space.
That being said, investing in cryptocurrency requires a deep understanding of how different platforms and tokens work, as well as the risks involved. Unlike the well-established, highly regulated markets for stocks, bonds, or even ETFs, crypto markets are relatively new, largely unregulated, and evolve quickly. While this presents many possible opportunities for investors and traders, there are no guarantees of positive results, given the volatility of this space.
How to buy AAVE crypto?
Buying AAVE is similar to purchasing most other cryptocurrencies. Here are the basic steps a user should know.
- The first thing required is an exchange account. Make sure the exchange allows trading of the AAVE cryptocurrency. AAVE is traded on several popular platforms like Binance, Huobi Global, Kraken, CoinTiger, and SoFi Invest®.
- After creating an account, a user can then deposit either Bitcoin, dollars (or another local fiat currency), or a stablecoin, depending on which trading pairs the exchange currently supports.
Buying crypto directly with a credit card may also be an option, but this often incurs higher fees (not only may the platform charge extra fees, but credit cards often treat crypto purchases as cash advances, leading to even more fees). - At this stage, a user can buy AAVE crypto. Simply select the trading pair that includes AAVE and the currency deposited in step 2.
For example, if a user had Bitcoin and wanted to buy AAVE, they would select the pair called "BTC/AAVE." If they had dollars, it could be "USD/AAVE." For a stablecoin like USDC, it might be "USDC/AAVE." Enter a buy order for the desired amount of coins at the desired price. Alternatively, on exchanges that include order books in the user interface (like Binance), you can easily select the highest sell order and buy it.
Alternatively, investors could use a decentralized exchange (DEX) to acquire AAVE crypto. Using a DEX like Uniswap, for example, only requires a crypto wallet like MetaMask. Users don’t have to create an account and can simply trade coins on the platform.
After buying AAVE tokens, some users may consider moving their crypto to a wallet that supports AAVE. This method of cryptocurrency storage offers added security as the coins can be moved offline and placed in cold storage, where they are less likely to be accessed by hackers.
